BRADENTON, Fla. - The Orlando-Orange County Expressway Authority is preparing to refund $499 million of variable-rate revenue bonds after negotiating a first-of-its kind forward agreement with Ambac Assurance Corp. to continue wrapping the bonds after several direct pay letters of credit expire.
The variable-rate refunding bonds are expected to price May 1. Proceeds will refund Series 2005A-E bonds currently insured by Ambac but which are trading off because of the insurer's rating downgrades, said Nita Crowder, the authority's chief financial officer.
"The Orlando-Orange County Expressway Authority managed to get a forward commitment from Ambac to insure the refunding bonds in the future if trading differentials normalize," Crowder said. "We worked really hard with Ambac on this and we're really proud that we came out with a compromise."
The authority paid $4.7 million for its insurance premium when the 35-year bonds were sold in 2005.
The uninsured refunding bonds will be offered in four series. They will be enhanced with letters of credit from Bank of America NA, Wachovia Bank NA, and SunTrust Bank. The LOCs will run from one to three years. The bonds mature over 32 years.
Fitch Ratings yesterday assigned ratings to the series 2008B bonds based on the LOCs using its "joint probability methodology." The $131 million 2008B-1 bonds are rated AAA/F1-plus; the $118 million 2008B-2 bonds are rated AA/F1-plus; the $150 million 2008B-3 bonds and the $100 million 2008B-4 bonds are rated AA-plus/F1-plus.
Fitch said the long-term rating assigned to each subseries is based jointly on the underlying rating assigned to OOCEA, currently A and the support provided by the LOCs.
Bank of America will back the 2008B-1 bonds. SunTrust will provide the LOC for the 2008B-2 bonds and Wachovia will back the 2008-3 and 2008B-4 bonds.
The short-term rating F-1-plus rating assigned to the bonds is based solely on the LOCs.
The banks are obligated to make payments of principal and interest on the bonds when due as well as purchase price for tendered bonds.
Moody's Investors Service assigns an A1 underlying rating to the expressway authority's bonds. Standard & Poor's rates them A.
Yesterday, Ambac and the expressway authority signed a forward commitment agreement stating that Ambac will wrap the bonds upon expiration of the LOCs at no additional cost, preserving the value of the unused original premium.
"It is the first time we've done it and it was a pretty big step," said Diana Adams, a managing director in structured finance and head of Ambac's task force on auction-rate securities and variable-rate debt. "The question was Ambac's willingness to write a forward commitment against a premium that was unrealized and because the expressway authority is such a strong credit we decided we would move forward with it. We think this will be attractive to other clients."
Adams said the innovative forward commitment is among several products the insurer has instituted or is considering in response to soaring costs issuers are facing as a result of volatility in the variable- and auction-rate markets.
Some of the volatility has been underscored by rating agency downgrades, which prompted the expressway authority to refund its Ambac-wrapped 2005 bonds.
Crowder said the expressway authority's remarketing agents began seeing a trading differential between 100 basis points and 500 basis points in pricing after the insurer's rating was downgraded.
Fitch in late January downgraded Ambac to AA from AAA and placed the lower rating on negative watch where it has remained since. Moody's and Standard & Poor's have maintained their triple-A ratings, but both have negative outlooks.
Ambac's parent company, Ambac Financial Group Inc., on Wednesday announced a net loss of $1.66 billion in the first quarter driven by losses on subprime-related securities the insurer guarantees, including nearly $1 billion dollars set aside by the company for claims it is likely to pay.
Moody's yesterday released a report saying it would maintain its negative rating outlook on Ambac Assurance's Aaa rating following the huge loss. Analysts yesterday warned that the insurer may need to raise still more capital to cover further losses.
Moody's warned that if its ongoing evaluation of U.S. mortgage market dynamics leads to an upward revision in stress case assumptions used to evaluate Ambac's capitalization, the insurer's rating could be placed on review for possible downgrade if it fails to meet the higher capital threshold.
Ambac executives have said they believe that despite the losses, the company's capital position remains strong enough to maintain its triple-A rating.
The authority's Series 2003 variable-rate bonds, insured by triple-A rated Financial Security Assurance Inc., have continued to trade normally or below the Securities Industry and Financial Markets Association index, Crowder said.
"Times are tough," Adams said, adding that Ambac wants to work with issuers and remain in the municipal market business. "I'd say we are taking steps that in the past hadn't been considered. But the current market alternatives are not as clear cut or easy.
"In the middle of a panicked market sometimes the best solution is not to walk away but to address the short-term issues ... with the expectation that the market will return to long-term stability," she said.
Citi is the senior manager of the remarketing syndicate, which includes Banc of America Securities LLC, SunTrust Robinson Humphrey Inc., and Wachovia.
First Southwest Co. is the expressway authority's financial adviser. Broad and Cassel is bond counsel. Shutts & Bowen LLP is disclosure counsel.
Troubles in the variable-rate bonds market related to financial guarantees are prompting similar transactions. The Menlo Park Community Redevelopment Agency in California this week completed the restructuring of its variable-rate bond portfolio after rates for the agency's Ambac-insured $72.4 million of tax allocation refunding VRDO bonds sold in 2006 spiked.
Six weeks of negotiations resulted in an agreement by the State Street Bank and Trust Co. to convert its existing liquidity facility into an irrevocable direct-pay letter of credit, and leave the Ambac insurance intact, according to Piper Jaffray & Co., the remarketing agent for the bonds.
Yvette Shields and Rich Saskal contributed to this story